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5 defensive funds for a lengthy eurozone crisis

23 July: After the second Greek election we said we were not out of trouble. With markets reeling today at the prospect of a bailout of Spain we repeat our choice of five funds from Citywire Selection we think should keep you safely invested.

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The second Greek election result has done nothing to resolve the uncertainties hanging over the eurozone and the global economy.

The New Year stock market rally seems an age ago. With the developed world’s sovereign debt crisis going hand in hand with a banking crisis, markets will remain highly volatile.

Now is probably not the time to be ‘risk on’. But disinvesting could be equally rash if a concerted moves by central banks and authorities finally propel us beyond crisis and into recovery.

With this in mind we asked Matt Goodburn of Citywire Selection to nominate the team's five favourite defensive funds.

Regular readers will recognise the names, all of which are star picks in Citywire Selection. Three of the funds featured in our recommendations for novice ISA investors in March.

All the funds have an impressive track record in preserving investors’ capital through turbulent times. But, be clear, although they have proved their defensive capabilities, they are not low risk. Most of these funds use financial derivatives and short sell stocks they believe will fall in price in order to construct portfolios that balance risk with protection. However, there is always the possibility that the managers will get these decisions wrong.

Click on the links below to see the funds' fact sheet with performance charts and further information.

Trojan

Citywire AAA rated Sebastian Lyon (pictured) posted a hugely impressive tenth consecutive calendar year of positive returns during 2011 with the £1.8 billion Trojan fund. His risk-averse stance and exposure to gold and index-linked bonds has been the key driver of returns. Lyon is maintaining these key positions, believing the problems linked to debt and money printing will have long, drawn-out consequences for the global economy. Cash is at nearly 20% and high yielding blue chip equities with strong balance sheets are the only equities he is happy to hold. MG.

Ruffer Investment Company

The investment trust is famous for delivering a 24% return during the financial crisis of 2008. In last year’s turmoil it did not pull off the same feat, although the net asset value of its portfolio held steady even if its share price fell modestly. Long-term performance returns remain very strong from one of the leaders in multi-asset investing which has a strong focus on capital preservation. Correlation across asset classes has been high, but Steve Russell (pictured) and Hamish Baillie remain focused on ensuring offsetting assets are fulfilling their role in protecting other parts of the portfolio. Around a third of the trust is in index-linked bonds and Japan provides the largest equity slice at 24%. The Japanese bet has performed well in fits and starts but has dragged on recent performance. MG.

Ruffer was the subject of one of our recent Fund of the Week videos. View the Citywire Money factsheets on Ruffer and Steve Russell.

Newton Real Return

Fund manager Iain Stewart (pictured) remains defensive in his £5.5 billion Newton Real Return fund with a high allocation to gold and cash in place. While being underweight government bonds and having 10% in gold dampened performance in 2011, Stewart is waiting for further market falls before adding to his high yielding equities and corporate bond positions. A small dip into the red of 0.4% during 2011 should not put investors off a fund that has posted consecutive positive returns in the previous four calendar years although performance so far in 2012 remains subdued. Over three years to 15 June it has achieved a total return of 27.6%. MG.

I have monies in 4 of these funds (or their unit trust equivalent) though not Jupiter. The one has disappointed me little, though I have only been invested in it for just over a year, is Newton Real Return. Am I being too impatient or has this fund now gone off the boil?.

almost all these funds are made up of inflation linked bonds plus gold, some high yielding shares, some Japanese stocks and cash. Why not buy M&G inflation linked corporate bond, a gold ETF (or fund) and a good equity income fund yourself and avoid the double management charge??

ISA23. The reason not to do it yourself is that these managers will change the investments depending on the market situation, so you'd have to keep your eye on what they're doing and of course you'd change well after they'd changed. These funds are designed for people who don't follow the markets closely and want a less risky investment approach.

Very interesting but after 20 years of being 'in' the markets followed by 5 years of being all but 'out' of the markets I'm still going to wait. The risk is just too high for me at the moment. I still fear a break up of the Euro or at least some countries having to leave and that will be messy, very messy!

I really don't see any credible long term solutions to the current economic crisis coming from our political leaders. They appear to be a little clueless as to what exactly to do. It might be just ok in the end but then again...

These funds are defensive and they may preserve your capital if all does go pair shaped but why take the risk?

You can maintain your cash against inflation returning 3-5%pa in long term deposit accounts if you shop around. I don't think now is a good time to be greedy.

Stock and shares ISA's are a really bad idea because you never want to sell then for fear of losing the tax shelter but by it's very nature, investment in stocks and shares is all about getting in and out at the right time.

Re the comment that stocks and shares ISAs are a really bad idea, one can always take out a choose your own shares version with a stockbrokers so there is no danger of losing the tax shelter when selling. Mind you, you have to be a better stock picker than I have been.

John Thorley you couldn't be more wrong. You say that 'investing in stocks and shares is all about getting in and out at the right time'. That is a recipe for disaster. If you were right Mr Thorley and followed your own advice you would be so rich you wouldn't be reading these columns!

Buying and selling like that is pure speculation. Eventually you will get your timing wrong and get thumped. Investing is about picking the right stocks and holding them as their earnings improve. If you do that the capital gain will, in the medium term, look after itself. Just look at the returns of a stock like Pearson through these difficult times. Up over 50% over 5 years and still yielding over 3%.... It doesn't take a genius to buy and hold good stocks...

Given the inflation risk and banking system credit risks around cash is in fact more risky (and lower yield) than many decent shares.

Cash yields of 3-5% are risky. You don't get that for no risk. Remember the Icelandic Banks.

RL are you an IFA per chance? Buy now, buy now, buy now, now now now, in fact never have I been to see any IFA at any time who said you know what? I wounldn't buy in just at the moment. In July 2008 an IFA said gosh what you doing with all that cash in the bank, I'ld buy one of my equity funds if I were you. Good job I ignored him.

If you think timing is of no import then you would put every penny into equity as soon as you earned it. Consider this if you put all your money into equity in the summer of 2000 across the FTSE 100 you now, 12 years later, would have less than you started with! So in real terms you would have lost loads. If, you invested in October 2002 and sold in March 2008, not quite the bottom and top but still you would have done very ncely thank you very much.

Putting money in the markets and just leaving it there is what the IFA's want so that they get years and years of trail commissions. The clever money will move in and out and eat your money for breakfast.

Finally, if the 3-5% offered by UK banks for time deposits backed by the FSCS is risky and doesn't pay back at the end of the term you really needn't worry about your money because you'll be more worried about where your next meal is coming from!

John Thorley, no I'm not an IFA, far from it. I agree about trail fees. There's another scandalous shoe to drop.

No, I Have a bee in my bonnet about terminology. No one should think that holding a share for less than 3 years is investing. It is not. It's speculation as over lesser periods the market is the most important factor in returns. Nothing wrong with speculating, but just don't call it investing.

I did not suggest investing in funds, though there are a (very) few excellent ones around. I suggest a basket of first class stocks.

Not much in that for the IFA, nor did I suggest buy buy buy.

As for FSCS I agree that is pragmatic in the short term, but if you ever have to rely on that you will be blown away by inflation.

The article seemed to show that you can still invest in some funds even if all goes even more pair shaped across Europe. Of course this is true, some shares and some funds will always do well, or at least not too badly in a falling market. However, picking the right ones is getting increasingly difficult and to my mind is now so difficult that it's not worth the risk.

For sure, if your after tax return on cash is less than inflation you are losing out in real terms but if you pick a fund or a share that is falling in absolute terms aswell then you are losing out even more so.

I think that too much emphasis is put on the real term losses that cash may be subject to in comparison to the risk associated with even medium or long term investment in equity as we stare down the barrel of a catastrophic collapse of the Euro. I think this is used as a weapon to beat unsuspecting people with savings into taking on higher levels of risk so that banks, IFA, FAs, fund managers and the like can claim their fees and commissions.

Fair enough if you are used to investments and all that goes with them carry on you're used to the ups and downs and you can all decide what risk you want to take, but every time you go into a bank now the teller almost always asks 'would you like an appointment with our financial advisor, they are very good you know?' From the point of view of an unsuspecting client who doesn't know exactly what's happening right now it's unfair and wrong.

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